An early January decision by Judge Valerie Caproni, of the United States District Court Southern District of New York, represents an important milestone in the ongoing saga of OW Bunker & Trading A/S, and its related companies.

Bruce Paulsen, partner at New York firm Seward & Kissel, explained to Seatrade Maritime News that: “Shipowners knew that they owed somebody money for bunkers taken aboard, but they were not sure whether they owed it to an OW company, or, instead, to the physical suppliers of the fuel.” Under the “Interpleader Actions” commenced during 2015- 2016, shipowners owing money for fuel taken in a late 2014, just prior to the demise of OW, paid money into the court, similar to an escrow fund. Paulsen further explained that the ruling concerned four “test cases” (out of 24 cases in front of this Judge), concerned fuel supplied by Nustar Energy Services in the US Gulf (to vessels controlled by NYK and by Clearlake) and by US Oil Trading LLC on the US West Coast (to vessels controlled by Hapag Lloyd).

Though legal complexities abound in the lengthy opinion rendered by Judge Caproni, the essence of the ruling is that the physical suppliers do not have a lien on vessels for the payments due for bunkers provided. According to Paulsen, “Suppliers of ‘necessaries’, such as bunker fuel, to vessel can obtain a maritime lien if they are following the order of owner, or a party authorized by owner. The judge decided that the physical suppliers did not receive their orders from the shipowners, so they do not have the lien.” The Judge conducted a thorough study of the four vessel fuelings, and noted that “…The uncontradicted testimony from the Vessel Interests is that they saw the choice of physical supplier as essentially OW’s to make….In short, the inclusion of the Physical Suppliers on the confirmations provided by O.W. and the Vessel Interests does not amount to a ‘selection’ by the Vessel Interests of NuStar or US Oil Trading.”

In these 24 cases, the court has not yet released the money being held. Paulsen explained that Judge Caproni’s decision brightens the outlook for Seward & Kissel’s client, ING Bank- the security agent under a $700m credit facility that had been extended to OW. He said, “For our client, this is a very important milestone.”

Lawyers representing OW’s US companies also looked favorably at the decision. Robert O’Connor, a Litigator in the New York office of Montgomery, McCracken, Walker & Rhoads, told Seatrade Maritime News: “Our client, OW Bunker USA Inc, is certainly pleased with the result; we believe that the Judge properly applied the Lien statutes, and we are pleased that the decision comports with the decisions rendered by other District courts.” O’Connor, who specializes in maritime matters, explained that the first decisions were rendered in late 2015 by a court in Texas, when an effort to assert a maritime lien by a supplier, in this case Valero, was denied in the Almi Sun case. In talking about the January, 2017 decision, he said, “There’s definitely momentum now,” referring to cases in Washington State, Alabama and earlier cases decided in the New York court by a different Judge.

The implications of the ruling could well go beyond the 24 cases before Judge Caproni; the detailed decision may also set a pattern for additional cases still to be decided by elsewhere in the US District Courts system, as well, according to Paulsen. The New York Southern District ruling is not binding on the other courts, but it is “persuasive authority,” he explained.

An early January decision by Judge Valerie Caproni, of the United States District Court Southern District of New York, represents an important milestone in the ongoing saga of OW Bunker & Trading A/S, and its related companies.

Bruce Paulsen, partner at New York firm Seward & Kissel, explained to Seatrade Maritime News that: “Shipowners knew that they owed somebody money for bunkers taken aboard, but they were not sure whether they owed it to an OW company, or, instead, to the physical suppliers of the fuel.” Under the “Interpleader Actions” commenced during 2015- 2016, shipowners owing money for fuel taken in a late 2014, just prior to the demise of OW, paid money into the court, similar to an escrow fund. Paulsen further explained that the ruling concerned four “test cases” (out of 24 cases in front of this Judge), concerned fuel supplied by Nustar Energy Services in the US Gulf (to vessels controlled by NYK and by Clearlake) and by US Oil Trading LLC on the US West Coast (to vessels controlled by Hapag Lloyd).

Though legal complexities abound in the lengthy opinion rendered by Judge Caproni, the essence of the ruling is that the physical suppliers do not have a lien on vessels for the payments due for bunkers provided. According to Paulsen, “Suppliers of ‘necessaries’, such as bunker fuel, to vessel can obtain a maritime lien if they are following the order of owner, or a party authorized by owner. The judge decided that the physical suppliers did not receive their orders from the shipowners, so they do not have the lien.” The Judge conducted a thorough study of the four vessel fuelings, and noted that “…The uncontradicted testimony from the Vessel Interests is that they saw the choice of physical supplier as essentially OW’s to make….In short, the inclusion of the Physical Suppliers on the confirmations provided by O.W. and the Vessel Interests does not amount to a ‘selection’ by the Vessel Interests of NuStar or US Oil Trading.”

In these 24 cases, the court has not yet released the money being held. Paulsen explained that Judge Caproni’s decision brightens the outlook for Seward & Kissel’s client, ING Bank- the security agent under a $700m credit facility that had been extended to OW. He said, “For our client, this is a very important milestone.”

Lawyers representing OW’s US companies also looked favorably at the decision. Robert O’Connor, a Litigator in the New York office of Montgomery, McCracken, Walker & Rhoads, told Seatrade Maritime News: “Our client, OW Bunker USA Inc, is certainly pleased with the result; we believe that the Judge properly applied the Lien statutes, and we are pleased that the decision comports with the decisions rendered by other District courts.” O’Connor, who specializes in maritime matters, explained that the first decisions were rendered in late 2015 by a court in Texas, when an effort to assert a maritime lien by a supplier, in this case Valero, was denied in the Almi Sun case. In talking about the January, 2017 decision, he said, “There’s definitely momentum now,” referring to cases in Washington State, Alabama and earlier cases decided in the New York court by a different Judge.

The implications of the ruling could well go beyond the 24 cases before Judge Caproni; the detailed decision may also set a pattern for additional cases still to be decided by elsewhere in the US District Courts system, as well, according to Paulsen. The New York Southern District ruling is not binding on the other courts, but it is “persuasive authority,” he explained.

The dry bulk market’s strong end to 2016 is unlikely to last long into 2017, according to the latest research from Maritime Strategies International. In its latest quarterly dry bulk market report, MSI predicts a depressed year for rates in 2017, a year marked by multiple risks to recovery.

Stronger freight markets in Q4 2016 had been broadly expected by MSI, albeit for slightly different reasons. While iron ore trade undershot its expectations, coal trade overshot them with geographical imbalances playing a key role.

However, MSI believes the short term support factors will have unwound in a matter of weeks. Chartering of Capesize vessels for iron ore out of Brazil and Australia for January loading had slowed before year-end, dragging down spot rates. French nuclear power capacity is set to resume output in January, placing downwards pressure on Panamax coal demand, coinciding with a slowdown in grains trade from the US Gulf.

Will Fray, Senior Analyst at MSI says a combination of factors will continue to shape the market during 2017, but in general, rates will remain depressed.

“In our Base Case there is little to suggest any significant changes to the market through the remainder of 2017 and it is MSI’s view that freight rates will remain depressed. Overall, we forecast deadweight demand growth will broadly match supply growth at around 3-3.5% year on year. On this basis we see little reason for freight rates to move meaningfully, other than for short-lived or localised spikes.”

MSI is marginally more positive for smaller geared bulkers, but marginally more negative for the larger vessels than earlier forecasts, based on year to date earnings data.

“In the longer-term, our forecasts for 2018 and beyond are still positive but have come down since our last update, mainly as a result of a slightly more bearish view of Chinese steel production, iron ore imports and European coal imports,” adds Fray. “We see very little room for supply-side adjustments to compensate given our already-weak contracting and strong scrapping Base Case forecasts. On average we have lowered our 2018-20 timecharter rate forecasts by 8-10% from our Q3 report.”

MSI highlights a strong potential for 2017 coal trade to deviate from its Base Case forecast due to uncertainty over Chinese and Indian imports. It also identifies Chinese iron ore imports as a key risk for the Capesize market, due to uncertainty over the timing of the peak of steel production and how quickly Chinese domestic iron ore production falls – or if it stops falling should iron ore prices surprise to the upside.

Source: Maritime Strategies International

The dry bulk market’s strong end to 2016 is unlikely to last long into 2017, according to the latest research from Maritime Strategies International. In its latest quarterly dry bulk market report, MSI predicts a depressed year for rates in 2017, a year marked by multiple risks to recovery.

Stronger freight markets in Q4 2016 had been broadly expected by MSI, albeit for slightly different reasons. While iron ore trade undershot its expectations, coal trade overshot them with geographical imbalances playing a key role.

However, MSI believes the short term support factors will have unwound in a matter of weeks. Chartering of Capesize vessels for iron ore out of Brazil and Australia for January loading had slowed before year-end, dragging down spot rates. French nuclear power capacity is set to resume output in January, placing downwards pressure on Panamax coal demand, coinciding with a slowdown in grains trade from the US Gulf.

Will Fray, Senior Analyst at MSI says a combination of factors will continue to shape the market during 2017, but in general, rates will remain depressed.

“In our Base Case there is little to suggest any significant changes to the market through the remainder of 2017 and it is MSI’s view that freight rates will remain depressed. Overall, we forecast deadweight demand growth will broadly match supply growth at around 3-3.5% year on year. On this basis we see little reason for freight rates to move meaningfully, other than for short-lived or localised spikes.”

MSI is marginally more positive for smaller geared bulkers, but marginally more negative for the larger vessels than earlier forecasts, based on year to date earnings data.

“In the longer-term, our forecasts for 2018 and beyond are still positive but have come down since our last update, mainly as a result of a slightly more bearish view of Chinese steel production, iron ore imports and European coal imports,” adds Fray. “We see very little room for supply-side adjustments to compensate given our already-weak contracting and strong scrapping Base Case forecasts. On average we have lowered our 2018-20 timecharter rate forecasts by 8-10% from our Q3 report.”

MSI highlights a strong potential for 2017 coal trade to deviate from its Base Case forecast due to uncertainty over Chinese and Indian imports. It also identifies Chinese iron ore imports as a key risk for the Capesize market, due to uncertainty over the timing of the peak of steel production and how quickly Chinese domestic iron ore production falls – or if it stops falling should iron ore prices surprise to the upside.

Source: Maritime Strategies International

Just 149 merchant ship orders (comprising bulk carriers, oil and products tankers and container ships) were placed in 2016, as shipbuilders in the powerhouse nations of China, Japan and South Korea saw a sharp drop in contracting, according to IHS Maritime and Trade newbuilding data assessing ships greater than 10,000 gt.

The total for the past 12 months compares with 1,094 orders recorded in 2015, and a peak of 1,568 orders in 2013.

China remained the top destination for vessel newbuilding orders in 2016, accounting for 43% of new orders seen. South Korea secured 27% of orders and Japanese yards secured 24%. Tankers took top spot at 40% of global orders with container ships coming in at 29%, bulkers 24%, and gas carriers 6%.

Chinese shipyards won 68 ship orders in 2016, down 82% year on year when they secured 379 and a 91% drop from the 788 vessel orders in 2013.

Only 21 individual Chinese shipyards recorded orders in 2016, compared with 47 in 2015 and 67 in 2013. Some 23 container ship were ordered in 2016, a decrease from the 132 box ships ordered in 2015. In 2016, bulker orders also pipped container ships at 25, although they were down from the 90 units ordered in 2015.

While shipbuilders in Japan and South Korea gained market share in 2015, new orders were dismal in 2016.

Japanese yards, which are renowned for constructing bulkers and stainless steel chemical tankers, have seen their dry bulk orders fall from a sustained level of around 260 new orders each year in 2013–15, to just 13 orders in 2016.

Across vessel types, only 11 individual Japanese shipyards recorded a total of 40 new orders in 2016, compared to 41 yards in 2015 with 483 orders.

Bulk carriers have formed the majority of Japanese new orders over the past few years, but the prolonged weak state of the dry bulk market has resulted in a low interest for newbuilding orders. The Baltic Dry Index’s fall to a historical low of 290 in February 2016 was certainly of no help to buying sentiments too.

In terms of tankers, South Korean yards have been maintaining their edge as the top destination for orders. However, as both the Baltic Dirty Tanker Index and Baltic Clean Tanker Index went on a continuous downward trend in the first three quarters of 2016 to levels last seen in 2009, tanker orders at South Korean yards fell to just 32 units in 2016, down from 137 units in 2015, according to IHS Maritime and Trade newbuilding data.

Across vessel types, only six individual South Korean yards recorded a total of 43 new orders in 2016, versus 11 yards with 232 orders in 2015.

Shipyards are likely to remain under pressure this year, with Chinese shipyards now facing the added challenge of higher steel prices. However fewer orders should help restore balance in the shipping market given current vessel oversupply.

Looming environmental regulations are pushing many shipowners to consider scrapping, according to a UBS survey. The increasingly likely candidates for scrapping appear to be vessel 15 years or older as a result of new ballast water and emissions rules.

Based on an online survey of owners and other shipping executives, UBS analyst Spiro Dounis says about half of respondents expect to scrap vessels between 15 and 25 years old rather than spend on retrofits, including ballast treatment gear and sulphur scrubbers.

Dounis says tankers may see higher levels of scrapping due to the relative age of the fleet, with nearly one-quarter of the tanker fleet at 15 years old or older. Some 17% of the dry-bulk fleet has that age profile and 19% of the container fleet.

Ballast water rules are more pressing as the International Maritime Organization (IMO) has set a phased-in implementation starting this September. The respondents to the survey believe only about 30% of the world fleet is already compliant with the new rules.

The survey showed 65% of respondents plan to retrofit vessels for ballast water treatment regulations. Owners are expected to spend between $250,000 and $1m on those retrofits with the special survey itself costing about $750,000.

The phase-in of the IMO’s rules for ships to emit no more than 0.5% sulphur, which are set to begin in 2020, is going to be implemented primarily through use of marine diesel fuel, with 74% of respondents expecting to use that fuel in place of high-sulphur fuel oil.

Scrubbers would allow ships to continue to burn high-sulphur bunkers, but only 19% of owners expect to install that technology, the investment banks survey showed.

The option to use LNG fuel, meanwhile, remains the least popular with only 5% of respondents expecting to use LNG.

THE three emission control areas established by Chinese authorities have now implemented low-sulphur fuel requirements for all key ports within the areas.

As of January 1, 2017, emissions regulations have come into effect for Tianjin, Qinhuangdao, Tangshan, Huanghua, Guangzhou and Zhuhai, according to a circular from the London P&I Club.

They join the core ports of the Yangtze River Delta, Shanghai, Ningbo-Zhoushan, Suzhou and Nantong which were part of the first phase of emissions regulations in which the ports were subject to a 0.5% fuel sulphur content cap as of April 1, 2016. The other two ECAs include ports in the Pearl River Delta and the Bohai Rim. Vessels will also be encouraged to use fuel with a maximum 0.1% sulphur content when at berth in the ECA, and 0.5% fuel when in ECA waters.

Emissions regulations at Shenzhen port in the Pearl River Delta ECA came into force on October 1 last year. In September 20016, the Yangtze River Delta (YRD) region said it would launch an incentive scheme for shipowners to cope with China’s own port emission control area, where vessels at berth are required to switch to low-sulphur fuel. The incentives, or subsidies, are to maintain the competitiveness of the ports encompassed by the ECA.

Ships calling at their terminals must pay more for the cleaner bunker fuel compared with ports elsewhere, according to an official in Shanghai Combined Port Administrative Office (a government body that co-ordinates port development in Jiangsu, Zhejiang and Shanghai).

Shanghai is proposing a unified subsidy level in the region, which is expected to come out by the end of this year, the official added.

China’s rapid implementation of ECAs at its ports will boost demand for cleaner marine fuels, and subsequently raise fuel costs for owners at a time when most shipping companies are struggling to survive.

Shipowners will have to find ways to accommodate higher bunker prices and decide whether certain trades are still feasible and whether they still want to do them, Hong Kong Shipowners’ Association managing director Arthur Bowring said in an interview.

ALTHOUGH owners’ earnings have been hit by overcapacity and a dearth of cargoes in 2016, demand for iron ore in China seems to be growing significantly. Chinese annual iron ore imports are certain to reach as high as 1.1bn tonnes in 2016 marking a year-on-year trade growth of 6% as compared to 953.37m tonnes in 2015.

Banchero Costa data revealed that total imports by China in the first eleven months stood at 935.8m tonnes as it tapped cheaper, higher quality iron ore from Australia and Brazil.

According to Arrow Research, China which imports almost two-thirds of the world’s iron ore supplies is expected to push past the billion tonne mark in 2016.

Chinese Customs data show that November imports reached 91.97m tonnes which is China’s third higher monthly volume in history.

“If the past is anything to go by and December imports outshine November’s, China total iron ore imports through 2016 could push to as much as 1.1 billion tonnes,” Arrow Research said.

Banchero Costa head of research Ralph Leszczynski also had similar views and said that, “I think it’s almost certain that the total for the year exceeded one billion tonnes, as it looks impossible that the volume in December could have been below 65m tonnes. My guess is that the figure for December should be about 90m tonnes, which would give a total of 1.02bn tonnes in 2016,” Mr Leszczynski added.

However, stockpiled iron ore across 41 major Chinese ports amounted to more than 111m tonnes by the end of 2016, nearly 18m tonnes more than at the close of 2015. “Such a voluminous accumulated inventory could see China pull back slightly on iron ore import volumes through the first quarter of 2017, but this would mark no deviation from past years,” Arrow Research said.

Meanwhile, Vale’s endeavour to build its inventory base in Malaysia and a distribution centre in China to increase its share of iron ore trade into China is likely to improve tonne-miles as shipments will increase between Brazil and Malaysia and Malaysia and China.

Ships at all major commercial ports in emission control areas (ECAs) set up by China last year are now required to burn low sulphur fuel for the majority of the period while at berth.

Although requirements were already mandatory at some ports in 2016, enforcement was limited, though not unheard of, as authorities gave ship owners the chance to prepare for the changes under laws that were developed and announced with very little lead time.

Enforcement is widely expected to be stepped up this year, particularly in the wake of recent pollution levels that prompted red alerts and closed businesses and schools across the north of the country. The port city of Tianjin was one of the locations hit most severely by pollution, to the point where port operations were suspended due to safety concerns over poor visibility and excessive particles in the air.

Under the timetable issued by the ministry of transport, since 1 January, ships at berth in the ports of Tianjin, Qinhuangdao, Tangshan, Huanghua, Shenzhen, Guangzhou, Zhuhai, Shanghai, Ningbo-Zhoushan, Suzhou and Nantong are required by law to burn fuel with a sulphur content of equal to or less than 0.5mm for the berthing period, excluding one hour after berthing and one hour before departure.

The Yangtze River Delta (YRD) ports of Shanghai, Ningbo-Zhoushan, Suzhou and Nantong had already made it mandatory for ships to burn low sulphur fuel from 1 April last year. They were joined on 1 October by Shenzhen, where authorities issued a local directive covering the terminals of Yantian, Shekou, Mawan and DaChan Bay.

The next key deadline under the national regulation is January 2018, when ships will be required to burn low sulphur fuel at all ports in the three ECAs for the entire berthing period. In January of 2019, all ships entering the ECAs, whether at berth or not, will be required to burn low sulphur fuel.

Huatai Insurance Agency, a mainland-based company that specialises in helping the private sector navigate China’s maritime environment, said the government may introduce stricter requirements at later date.
“The government will evaluate the effect of the requirements in order to determine whether to take the following steps in the future: (i) when entering the ECAs, ship shall be required to use fuel with the sulphur content of no more than 0.1% m/m; (ii) enlarge the geographical scope of ECAs; (iii) other further measures.”

Ships in breach of the rules are liable for fines of between USD1,500 and USD15,000 under the Law of Prevention of Air Pollution of the Peoples’ Republic of China. Ships are required to keep bunker delivery documents on board for three years and a sample of fuel for one year, under the Regulation of Prevention and Control of Marine Pollution Act. Fines up to USD1,500 can be imposed on owners that fail meet the fuel record keeping requirements.

The China Maritime Safety Administration (MSA) issued guidelines on the implementation and supervision of ECAs that state how compliance with emission control measures will be verified.

For ships using low sulphur fuel, verification will be made by check of bunker delivery notes, fuel changeover procedures, engine room logbook records and fuel oil quality/samples. For ships using alternative measures to reduce emissions, such as shore power, LNG or exhaust gas scrubbers, checks will center on the International Air Pollution Prevention (IAPP) Certificate/Record and engine room log book records.

Analysts said the availability of low sulphur fuel for vessels and support of the national oil companies that dominate oil and gas upstream and downstream sectors would be critical to ensure the success of the new regulations.

Local authorities in Shenzhen said ships could apply for immunity and exemption from the regulation in certain cases, including supply of sufficient proof that they made every effort but did not succeed to obtain low sulphur fuel.

The Shenzhen order said shipowners could also take alternative measures to reduce pollutants while at berth, including use of liquefied natural gas and other clean energy sources. Alternative measures need to be approved in advance by the Shenzhen Residential Environment Committee and the Shenzhen Maritime Safety Administration.

The Shanghai Maritime Safety Administration also launched an exemption scheme that allows shipping companies or agencies to apply for an exemption if using low sulphur fuel oil is unsafe for vessels.

Protection and indemnity (P&I) clubs have been feeling the pressure, with many in 2016 looking to give members an end-of-year boost.

A scarcity of major losses has led to clubs increasing their reserves in recent years, while demands to give some of that excess cash back have been growing. In recent months several clubs have announced that they will not seek a general increase for the year and will also hand back a percentage premiums from prior years.

Unless major losses break out in 2017, the calls for a similar approach for the 2018–19 renewals will continue. Joe Hughes, chairman and CEO of the American Club’s managers, Shipowners Claims Bureau, said another dynamic was the willingness of owners to look elsewhere for placing tonnage in hope of reducing costs.

“I feel that over the last 12 months, for ourselves and other clubs the churn effect has continued to influence both the level of turnover and the risk profile of vessels entered in the club, the more so as the freight market slump has endured,” he told IHS Fairplay. “For us, annualised premium income for 2016 has increased over the period since 20 February,” Hughes pointed out. “At the same time, the club has experienced a comparatively larger rise in total tonnage and the average size of entered vessels, together with a reduction in their average age.”

American Club, like many others, had announced there would be no general increase across all classes of business for the 20 February 2017 renewal, but Hughes said the club expected “a period of vigorous negotiation from the related perspectives of both member and club”.

Jeremy Gross, Standard Club’s CEO, told IHS Fairplay, “2016 has been a gruelling year for most sections of the shipping market. Sadly, we have seen some major players fail this year, while there appears to be a drive for consolidation. I suspect that this ongoing existential pressure will continue to force many shipowners to re-evaluate historic strong relationships to ensure they continue to best serve their needs. We in the club market need to be responsive to this. We need to examine our costs, our structures, and our service to make sure they are lean and fit for purpose. Fortunately, it has been a relatively benign year for claims, but if we see an upswing we will need to be able to keep our underwriting results in tight equilibrium as investment markets continue to be unpredictable,” Gross pointed out.

North P&I Club joint managing director Paul Jennings said the club had a good year, adding that it “has been positive in terms of claims experience, investment performance, and membership development.” Co-MD Alan Wilson said the club was working with its clients to smooth the burden of the current financial downturn. “The benign claims performance is a positive development, given the operational and financial challenges facing the shipping industry in 2016-17,” he added. “Members have increasingly collaborated with the club in 2016-17 to share trends, emerging risks, and best practice within the industry. By taking this information together with extensive internal analysis and benchmarking across the insured fleet, North was able to work with members and other partners in the industry to help reduce claims exposures.” Wilson cautioned that challenges remained for 2017. “North believes the outlook for investment and bond markets remains highly uncertain, with high-profile political factors likely to have an impact. Regulatory issues likely to have a bearing on activities during 2017-18 include the amendments to the Maritime Labour Convention (MLC), which enter force on 18 January 2017,” Wilson explained.

Peregrine Storrs-Fox, risk management director at the TT Club, said the absence of market-changing losses was a positive but was also difficult for the clubs. “There is a problem at present for any insurers to get the premiums they want,” he added. “Our clients are struggling, we have seen some high-profile insolvencies. The market is not seeing the losses that allow it to prove its worth, and the insurers are expected to support their clients. For 2017, pricing will remain the name of the game,” he predicted. “There are some green shoots but we have seen them in the recent past and they seem to get cut as quickly as they grow.”